Health Care Reform – The What, Who, Where, When, How and Why of the Individual Penalty

By now it is not news that starting 2014 every American is expected to have Health Insurance or pay a penalty, formally called the individual shared responsibility penalty. What? Who? Where? When? How? And Why?

What is the penalty?

The penalty graduates as the law is phased in, as follows:

• 2014 = $ 95 per adult and $ 47.50 per child (up to $ 285 per family) or 1% of family income, whichever is greater

• 2015 = $ 325 per adult and $ 162.50 per child (up to $ 975 per family) or 2% of family income, whichever is greater

• 2016 = $ 695 per adult and $ 347.50 per child (up to $ 2,085 per family) or 2.5% of family income, whichever is greater

The penalty is pro-rated by the number of months without coverage, though there is no penalty for a single gap in coverage of less than three months in a year.

Who is assessed the penalty?

The individual shared responsibility penalty is applicable to every American citizen or those “lawfully present” in the U.S.

Exemptions to mandatory coverage apply for individuals exempt from filing an income tax return, those whose religion opposes acceptance of benefits from a health insurance policy, members of Indian tribes and incarcerated individuals (unless their incarceration is pending disposition of charges). There is also an exemption for individuals (and their spouses and dependents) who’s employer-provided health coverage would cost more than 8%of the employee’s modified household income, and an exemption for individuals with a gap in coverage of less than 3 months in a year.

Where does the penalty get paid?

The penalty will be included on personal tax returns. For spouses filing joint tax returns, the spouse is jointly liable for the penalty of the spouse and those claimed as a dependent on the tax return. The IRS has indicated that insurance companies will notify the IRS regarding taxpayers’ compliance with the mandate to have insurance coverage, reporting annually on a form similar to the 1099-MISC. Employers will include the value of health insurance coverage on forms W-2.

When does the penalty start?

Minimum essential health insurance coverage is required beginning January 1, 2014 and will be reported on tax returns filed for the year 2014.

How do I get insurance?

1. Obtain coverage through their employer or spouse’s employer, if available;

Tips:

-licensed insurance agents that are certified by state exchanges are able to assist consumers that do not want to go through the exchange and still get subsidy

-there are many things to consider when buying a health plan, make sure that ALL of your questions get answered , not just about the penalty or subsidy, but what type of health plan is best for you and your family. Health insurance agents may be best suited for all your questions, because they have the most experience with the insurance carriers, and knowledge of health insurance plans.

Why is an individual responsibility penalty part of the law?

There are two main reasons. The first is to encourage people to obtain health insurance. When people are uninsured, they try to do without health care or risk being injured without access to care, making health issues worse because untreated. Eventually, health issues catch up to them or they are involved in an accident, and they go to emergency rooms and other clinics for services that they can never fully pay for. This causes hospitals and health care providers to be left with large balances of uncollectible receivables that they then pass onto other consumers in the form of higher rates for health care services. It is estimated that, prior to reform, 26 cents of every dollar spent on health care in the United States is allocated to the cost of the uninsured.

The second main reason is to facilitate guaranteed issue of insurance for individuals. Prior to reform, an individual that tried to buy health insurance outside of an employer sponsored plan could be denied based on health conditions that existed at the time of application, known as pre-existing conditions. Pre-existing conditions led to half of all applications for insurance being denied. The individual responsibility penalty aims to guarantee that all individuals applying for insurance qualify.